Bitcoin isn't PRISM-proof

In the aftermath of the revelation of PRISM, the NSA spying program that collects user data from nine major U.S. tech companies, many have highlighted alternate options from organizations that are not known to be cooperating with government surveillance efforts.

Among those alternatives, Bitcoin has been pegged as a more private payment option. At Prism-Break.org, which lists alternatives to all the services that fall under the PRISM umbrella, Bitcoin is the only listed alternative to online payment services, such as PayPal and Google Wallet.

But users should know that Bitcoin is not as anonymous as it seems, and while there is no evidence that Bitcoin services are collaborating with federal agencies, information on Bitcoin transactions is readily available to them on the Internet.

A 2011 study conducted by University College Dublin researchers Fergal Reid and Martin Harrigan concluded that although anonymity has been one of Bitcoin's main selling points, "Bitcoin is not inherently anonymous."

"We have performed a passive analysis of anonymity in the Bitcoin system using publicly available data and tools from network analysis," the researchers wrote in a blog post. "The results show that the actions of many users are far from anonymous. We note that several centralized services, e.g. exchanges, mixers and wallet services, have access to even more information should they wish to piece together users' activity. We also point out that an active analysis, using say marked Bitcoins and collaborating users, could reveal even more details."

In 2012, the publicly available data on Bitcoin transactions was used by researchers Adi Shamir and Dorit Ron to identify the first ever transaction on the network, which is believed to be from an account held by Bitcoin's mysterious creator, known only as Satoshi Nakamoto. While these transactions were covered up quite well, Ron and Shamir concluded that they are not entirely untraceable.

"Finally, we noted that the subgraph which contains these large transactions along with their neighborhood has many strange looking structures which could be an attempt to conceal the existence and relationship between these transactions, but such an attempt can be foiled by following the money trail in a sufficiently persistent way," the report explains.

This may not come as a surprise to the most passionate members of the Bitcoin community, who look at Bitcoin as a movement to revolutionize online payments, rather than a tool to remain anonymous on the Internet. Zach Harvey, co-founder of Lamassu and co-creator of the Bitcoin ATM, says Bitcoin is actually "horrible for money laundering" because the veil of anonymity can be lifted.

Indeed, late last month the online currency exchange service Liberty Network, which is similar to Bitcoin, was infiltrated by international law enforcement agencies that allege it laundered more than $6 billion in money for criminal organizations. The investigation was brought down after an undercover agent created an account on Liberty Network and listed the purpose as "cocaine."

Basically, if independent researchers can trace Bitcoin transactions back to the people responsible, and the U.S. government can investigate digital currencies hosted overseas (Liberty Network was based in Costa Rica), then the NSA, CIA, FBI or any other federal agency can likely peek into Bitcoin activity as well.

Colin Neagle covers emerging technologies and the startup scene for Network World. Follow him on Twitter and keep up with the Microsoft, Cisco and Open Source community blogs. Colin's email address is cneagle@nww.com.

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